We have all read the news, made speculations about and know folks who were impacted by the crash. It has been pretty doom and gloom for the most part but here is one change I thought should get more press.
For my whole career as a mortgage guy, I would always counsel clients when buying a home and/or doing a refinance – if they did not have 20% available – to look at getting a small second loan instead of private mortgage insurance (PMI). PMI is insurance for the lender, not the buyer. Some have even named it ‘foreclosure insurance’.
To structure that, we would take the value and/or the purchase price and set the first loan at 80% of that value. Then we would set up a smaller second up to 95% of that value. That made it possible to not have PMI each month. It also gave those who wanted to handle their own taxes and insurance that ability because if your loan is less than 20% equity – you have to have your escrow account with that lender.
But after the crash Fannie Mae and Freddie Mac changed the way they priced your first mortgage interest rate if you had a second. Take a guess: they did not do that for the benefit of us, the customers. Raising the rate gives them a bit more interest over the life of the loan for folks who took out a second when doing a refinance or a purchase. You could speculate many ways as to why but unless you are at those Board of Directors meetings you will never know.
So today when you connect with me for a quote of a purchase or a refinance and you don’t have the 20%, don’t be surprised to see one with PMI. Trust me, the thought of “paying” someone money each month that has no benefit to me is hard to wrap my head around. But then tell me that my interest rate for the loan will be between .125-.25% lower if I have PMI. Well, that is real money over the life of the loan, hence my change when sending estimates.
Have a great week!